The clue to HSBC’s new strategic priorities lies in the theme: Return to Growth and Value Creation. The update was steady rather than radical, which is positive for credit investors.
Recently-appointed CEO John Flint’s first strategy update was wide-ranging. Assuming normalising interest rates and synchronised economic growth, management are looking to drive increasing revenue and returns from areas of existing strength; turn around low-return businesses; improve the customer experience; increase competitiveness; and, via organisational simplification and investing in skills, make it easier to deliver for customers.
“From a credit perspective, the updated priorities were reassuring as they do not point to a radical change in strategy. The bank now has a growth mindset but does not intend to increase its risk appetite or diminish its balance sheet strength. This is good news for debt investors,” said Pauline Lambert, executive director in the financial institutions team at Scope Ratings. “Taken in the round, maintaining its risk appetite while aiming to improve returns, continuing to cut costs and targeting a higher capital position are credit positive.”
The 11% Return on Tangible Equity target is not materially different from the bank’s previous 10% ROE target, but HSBC will seek to achieve the new return target with a CET1 ratio at least 14% between 2018 and 2020. “While the bank has not met its return target over the last few years, the change in focus to growth rather than transformation provides better impetus for the target to be met,” Lambert said.
A key plank of the new plan is USD 15-17bn of investment in growth and technology. About two-thirds will be for investments in new opportunities as well as core businesses to grow, improve customer service and defend competitive positions. The remaining third of investments will for improving productivity and core infrastructure and required regulatory programmes and service sustainability such as cyber security.
The ability to keep up with technological change to meet changing customer behaviour and manage operational risks is an increasingly important consideration for banks. “While the bank emphasised the goal to embrace new technologies, the planned investment in this area and in technology more generally is difficult to assess as management did not provide a detailed breakdown,” said Lambert. In 2017, HSBC spent over USD 5bn on technology and between 2015-2017 over USD 2bn in digital investments.
The US continues to be the largest exporter of client revenue to the group (client revenue from US-managed companies booked outside the US) and HSBC is a top five cross-border USD clearer. The CEO acknowledged that while the US business is profitable, returns are far from satisfactory. Management considers the new >6% RoTE target to be achievable over 2018-2020 but does not see this as a limit. From resolving legacy issues, the focus will now be on organic growth.
“The CEO disclosed that there were many management discussions about the US business, with all options being considered, from making acquisitions to disposal. They concluded that because neither offered the same kind of value creation for shareholders it was better to turn around and grow the business,” said Lambert.
The bank plans to grow in the US across all divisions: increasing the number of corporate customers served by Commercial Banking (particularly international mid-market companies); increasing higher-return consumer lending and business banking in Retail Banking & Wealth Management; and expanding sector coverage and the share of foreign multinational clients in Global Banking & Markets. The bank said the investment required for this will be funded through efficiency gains.
The UK ring-fence is scheduled for completion in July, ahead of the 2019 deadline. As a consequence of the ring-fence, investors will have improved visibility over the quality of the UK operation. On the business front, HSBC wants to increase its share of the UK mortgage market and increase its commercial customer base. On the former, it has ground to make up: HSBC has a 14% share of UK deposits but only a 7% share of mortgages.
Summary of goals
- High single-digit annual revenue growth from Asia (building on the strength of the Hong Kong franchise and expanding in wealth management, including insurance and asset management)
- Mid to high single-digit annual revenue growth from the international network (opportunities include global liquidity and cash management, trade finance and securities services)
- Market share gains in eight markets where the bank is operating at scale as a universal bank (where it is considered a leading domestic bank with access to local growth opportunities): Hong Kong, UK, Mexico, Pearl River Delta, Singapore, Malaysia, UAE, Saudi Arabia
- A number one ranking among international banks for the Belt and Road initiative
- Completing establishment of the UK ring-fenced bank and gaining market share in UK mortgages and growing the commercial customer base
- Gaining market share in transaction banking
- Better employee engagement
- Continued progress towards the commitment to invest USD 100bn in sustainable finance by 2025
- An independently-assessed ‘outperformer’ ESG classification
- An >11% RoTE by 2020
- A >6%RoTE for the US business by 2020
- Positive adjusted jaws in each year on a full-year basis
- Redeploying capital into higher-return and capital efficient businesses
- Managing RWA growth to 1%-2% annually to drive an improvement in reported revenues as a percentage of average RWAs from c.5.9% in 2017 to c.7% in 2020